Rethink Real Estate: All about the New Markets Tax Credit

The Ely Walker building in St. Louis, MO was redeveloped with the help of the New Markets Tax Credit. Photo by Nick Findley via Flickr.

Earlier this month, Smart Growth America released Federal Involvement in Real Estate, a survey of over 50 federal programs that influence real estate in some way. This post is the first in a series taking a closer look at some of the programs included in that survey. Today’s post looks at the New Markets Tax Credit.

New Markets Tax Credit allows individual and corporate investors to receive a credit against their federal income tax return in exchange for making an investment in a specialized financial institution called a Community Development Entities (CDE). Congress created the credit in 2000 as a way to attract private capital to businesses in economically challenged communities. Authorized under the Community Renewal Tax Relief Act of 2000, the program has appropriated billions of taxpayer dollars to promote investment in these areas that are often overlooked by traditional financing sources.

New Markets Tax Credits are awarded to CDEs through a competitive process regulated by the Community Development Financial Institutions Fund, a program within the U.S. Department of the Treasury. To qualify as a CDE, an organization must demonstrate a primary a mission of serving, or providing investment capital for, low-income communities or low-income persons, and maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity. The Community Development Financial Institutions Fund is authorized to allocate $3.5 billion to CDEs nationwide.

Once a CDE receives its credit allocation, private investors who make qualified equity investments are eligible to claim the New Markets Tax Credit. Typical investors include banks, major corporations, venture capital firms and other investment funds. In order to claim the credit, a CDE must use at least 85 percent of an investor’s funds to make a qualified low-income community investment (QLICI) in an approved business for a seven-year period.

QLICIs must be invested in a qualified active low-income community business. In order to qualify, the business must be located in a low-income community; must generate a substantial portion of its revenue from activity in a low-income community; and services performed for the business by its employees must be performed in a low-income community. QLICIs can be used for commercial, industrial, and mixed-use projects, or to purchase loans from other CDEs in low-income communities.

The Community Development Financial Institutions Fund defines a low-income community as a U.S. Census tract with a poverty rate of at least 20 percent, or an area in which the median family income does not exceed 80 percent of the statewide median income. In 2010, approximately 39 percent of the nation’s Census tracts containing 36 percent of the population qualified for these investments.

The New Markets Tax Credit program benefits communities and investors alike. It allows investors to claim a tax credit equal to 39 percent of their investment for up to seven years. At that rate, an initial investment of $1 million could result in a total tax credit of $390,000 over seven years.

Since its creation, the New Markets Tax Credit has been used to finance charter schools, supermarkets, healthcare facilities and a variety of other businesses that have spurred economic development in underserved communities across the country. Many would not have been possible without the program.

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The New Markets Tax Credit is just one of the over 50 federal programs included in Smart Growth America’s recent report. These programs have accumulated over a long period of time and have never been viewed as a whole. As a result, they are unlikely to work together toward a coherent set of objectives or policy direction.